When a new investor is first starting out in this business, funds are nearly always in short supply. That being the case, how and where can you get the cash to put down an earnest money deposit (EMD) on your deals?
Well, Jason Lucchesi back with you again to help…
I remember exactly what it felt like to want to move forward with my business but being strapped for cash. When I first started out, I was living from unemployment check to unemployment check, and extra cash was a foreign concept to me.
Now, it is possible for you to do deals without cash in the beginning... even without using your own funds for EMDs.
But, having said that, it’s important for me to say that maybe you should just be wholesaling deals at this point until you do have the cash for your earnest money deposits.
Regardless of the route you choose – I’m here to help, so today, I want to walk through some options and ideas about how you can handle the EMD situation…
Consider This
You’ve got a contract together, and say it’s a rock-solid deal for $30k. You know you can flip it to another investor for $45k. Most buyers, in this case, require an earnest money deposit.
Allow yourself 3 to 5 business days to get your deposit to the seller. What I do is put the funds in an escrow account with my title company. They are held in escrow until we close.
And I have my end buyer give me a “hard” deposit. This means it is nonrefundable.
The only time that I would ever give those funds back from a hard deposit standpoint - is if I didn’t disclose something properly in my purchase and sales agreement. Say an inspection happens and they find termite damage. Or perhaps there are foundation problems. If that is the case, then it’s my fault and I will give the funds back.
I highly encourage you to operate in the same way in your business — with integrity. Because you don’t want to get a cash investor upset over piddly amounts of money. You have to think long term.
So, I get the end buyer’s funds, a hard deposit. If I’m going to be at $45k on my second transaction, where I’m doing an A to B, B to C transaction, what I do is require a deposit of $2k. This means that buyer is fully committed to the deal.
If you ask for only $250 or $500, they may not be fully committed. The higher the deposit, the stronger the commitment.
This money will go into the escrow account at the title company. If your deposit for the A to B transaction is $500, you can let the seller know they can call and verify that the earnest money deposit has been put in place for the transaction.
Time Keeps on Ticking…
In the addendum section of the purchase and sales agreement, state that earnest money deposit funds will be deposited 3 business days before closing. That allows time to find the end buyer...
This is why it’s crucial that you have a solid buyer’s list at the ready. Timing is of the essence. As soon as you get a deal, you want to be able to quickly get it under contract with an end investor buyer.
Make sure there is some sort of inspection period stated in your contract, so the deposit does come back to you if something pops up on the appraisal or inspection. Have these clauses in place to ensure that you are making a proper deal.
See, the idea here is to set up the deal so that you will not be using your own funds by using your end buyer’s funds in a way that’s fully legal. When you ask for a deposit from the end buyer - that supplies the deposit money you need for your part of the deal.
You can also use transactional funding which, again, ensures that you are not using your own money in the deal.
More Helpful Notes
HUD Deals
The strategies given here of using the end buyer’s funds for your own earnest money deposit will work on HUD deals as well. The problem is, you only have 2 days, so must move quickly or you could lose the deal.
Seek Legal Counsel
I want to remind you that I am not an attorney, and this should not be interpreted as legal advice. For that, you need to seek out your own experienced legal counsel.
Your Ideas
Some of you Moguls may have ways you get around using your own cash for EMD, and if so, I welcome you to share them in the comments section below.
Avoid using your own funds whenever possible.
Work to build up your active buyer’s list.
Operate your business fairly and with integrity.
Seek your own legal counsel for your power team.
Jason Lucchesi
Jason Lucchesi is the co-founder of real estate and marketing company Global Fortune Solutions, LLC. Jason has been in the real estate industry since 2002, where he began his career as a Loan Officer. His career flourished in the mortgage business when he accepted an Account Executive position with Countrywide in 2004. Within his first six months, he had achieved the #1 Account Executive in the Midwest territory. In January of 2006. During this time, Jason began investing part-time in multi-family rental properties while also becoming involved in wholesaling. By 2006, Jason was transferred to the Indianapolis area to save a struggling branch. He quickly took the branch out of the red into the green while also beginning to purchase distressed residential properties part-time. In 2007, Jason began pursuing his ultimate dream of becoming a full-time real estate investor and began investing in REOs in 2008. Since then, Jason has been involved with many aspects of real estate including short sales, tax sales/deeds purchasing, purchasing homes in distress, wholesaling, and many other avenues. Jason has been married to his wonderful wife Jamie since 2007, and they are proud parents to their sons Brady and Gavin.